PostRock Reports First Quarter Results

/ Source: GlobeNewswire

OKLAHOMA CITY, May 11, 2011 (GLOBE NEWSWIRE) -- PostRock Energy Corporation (Nasdaq:PSTR) today announced results for the first quarter of 2011. Revenues totaled $24.8 million, a 20.9% decrease from the prior-year quarter. The decline was primarily due to significantly lower realized gas prices and a slight decline in production, partially offset by higher pipeline revenue. Average realized prices for the period, excluding hedging, decreased to $4.33 per Mcfe, a 22.9% decrease. Excluding prior-year production from Appalachian assets that have been sold, production declined 1.5% from the prior year period to an average of 51.9 Mmcfe per day. The decrease was primarily due to adverse weather in the Cherokee Basin during February which deferred production. Pipeline revenue increased 18.6% to $3.2 million, primarily due to higher volumes and additional short-term contracts. Realized hedging gains in the quarter increased to $9.2 million, a 35.3% increase from the year earlier period.

Production costs, including lease operating expenses ("LOE") and production taxes totaled $12.4 million, a 2.6% decrease from the prior-year quarter. The decline was primarily due to a $0.7 million reduction in ad valorem taxes and $0.2 million lower severance taxes, offset by $0.6 million higher LOE. The reduction in taxes reflected the lower realized gas prices. LOE increased primarily as a result of higher than expected one-time well repair expense on oil wells in Oklahoma. Total production costs were $2.66 per Mcfe for the period, a slight increase from that reported in the prior year. During the quarter, the Company recovered $1.4 million of the cost to operate the gathering system through third party gathering fees. These fees are recorded as revenues. LOE net of this recovery was $1.91 per Mcfe. Pipeline operating expense totaled $1.7 million, a 5.0% decrease from the prior-year quarter.

General and administrative expenses totaled $4.9 million, a 33% decrease from the prior-year period as accounting, tax, audit and financial advisory fees decreased $1.6 million and legal fees decreased $900,000 from the year-ago period. These reductions resulted from efficiencies achieved through the recombination of PostRock's predecessors in March 2010 and its re-capitalization in September.

In the quarter, the Company added $9.5 million to its litigation reserves, bringing the total to $10.5 million. This amount is the current estimated exposure relating to royalty litigation pending in Oklahoma and Kansas. These lawsuits represent the last known significant contingent liability remaining from the predecessor entities. The Company will continue to vigorously defend these lawsuits.   

Debt and Liquidity

At March 31, 2011, PostRock had $203.9 million of outstanding debt. This consisted of $181.5 million under its Borrowing Base Facility, $12.0 million of Secured Pipeline debt and $10.4 million on its non-recourse QER Loan. The Secured Pipeline Loan will be paid off in equal installments over the next twelve months. Including $1.5 million of outstanding letters of credit available liquidity at March 31, 2011 approximated $42.0 million.

Amounts available under the Borrowing Base Facility will be redetermined as of March 31, 2011. The redetermination will be effective July 31, 2011. The borrowing base is determined based on the value of oil and gas reserves using its lenders' price forecasts. Primarily due to a reduction in lender price forecasts since the last redetermination, a reduction of the borrowing base is anticipated. At March 31, 2011, the Company was in compliance with all financial covenants.

Hedges

PostRock holds natural gas hedges covering 37.1 Mmcf a day for the remaining three quarters of 2011 at an average price of $6.27 per Mcf. The Company also holds hedges covering 30.1 Mmcf a day in 2012 at an average price of $6.56 per Mcf and 24.7 Mmcf a day in 2013 at an average price of $6.58 per Mcf. The fair value of the Company's hedges at March 31, 2011 was $50.7 million. The fair value of the hedges changes daily based on oil and gas price fluctuations.

Capital Expenditures

In the quarter, capital expenditures totaled $8.9 million, a $900,000 increase from the prior-year period. The Company spent $8.2 million on production, $500,000 on equipment and maintenance and $200,000 on land.

Shelf Registration Statement

On May 3, 2011, PostRock filed a $100 million universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC). Once declared effective by the SEC, the Company may issue securities under the shelf in one or more offerings over a 12 consecutive month period having a total value not to exceed one-third of the Company's equity public float. At present, that limit approximates $21.7 million.

The shelf registration statement is intended to give PostRock the flexibility to sell securities if and when market conditions and circumstances warrant, to provide funding for growth or other strategic initiatives, for debt reduction or refinancing and for other general corporate purposes. The actual amount and type of securities, or combination of securities, and the terms of those securities, will be determined at the time of sale, if such sale occurs. If and when a particular series of securities is offered, the prospectus supplement relating to that offering will set forth the intended use of net proceeds.

Management Comment

Commenting on the results, David C. Lawler, President and Chief Executive Officer, said: "While we found it necessary to reserve a substantial amount in the quarter related to royalty litigation, our core business performance was solid. In January, we closed on the second of an anticipated three phase sale of certain Appalachian assets to Magnum Hunter. The proceeds were used to further reduce the outstandings under our non-recourse QER loan. This sale was has allowed us to refocus our attention on the Cherokee Basin. We hope to close the third phase in the second quarter and to eliminate the remaining non-recourse loan balance."

"During the first quarter, we drilled and connected 39 development wells, completed 9 new wells drilled in prior periods, recompleted or connected 20 wells and returned 30 wells to production in the Cherokee Basin. Our average cost for a new development well was $142,000, a 9% decrease from the fiscal year 2010 average of $156,000. In aggregate, the average new development well is expected to provide a 24% rate of return and is currently producing at above expected rates. While initial results are encouraging, it is too early to tell if production from the new wells will continue to rise and reach the anticipated peak. However, if our development continues to meet or exceed expectations, we would expect to see production grow year-over-year."

"Gross margin of our pipeline operations improved by 63% from the year-ago period to $1.5 million as a result of our focused efforts to increase utilization, add new transportation contracts and reduce operating costs.  We believe our improved credit profile, expanding services, cost reductions and potential exposure to the emerging Mississippian play in north central Oklahoma will continue to attract additional customers and new transportation contracts to provide a consistent stream of revenue."

PostRock Energy Corporation is engaged in the acquisition, exploration, development, production and transportation of oil and natural gas, primarily in the Cherokee Basin of Kansas and Oklahoma. The Company owns and operates over 3,000 wells and nearly 2,200 miles of gas gathering lines in the Basin. It also owns a 1,120 mile interstate natural gas pipeline, which transports natural gas from northern Oklahoma and western Kansas to Wichita and Kansas City

PostRock's logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=7221.

Webcast and Conference Call

PostRock will host its quarterly webcast and conference call tomorrow, Thursday, May 12, 2011 at 10:00 a.m. Central Time. The live webcast will be accessible on the 'Investors' page at www.pstr.com, where it will also be available for replay. The conference call number for participation is 866-516-1003.

Forward-Looking Statements

Opinions, forecasts, projections or statements, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. Forward-looking statements in this announcement are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results may differ materially due to a variety of factors, some of which may not be foreseen by PostRock. These risks and other risks are detailed in the Company's filings with the Securities and Exchange Commission, including risk factors listed in the Company's Annual Report on Form 10-K and other filings with the SEC. The Company's filings with the SEC may be found at www.pstr.com or www.sec.gov. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this release.

Reconciliation of Non-GAAP Financial Measures

PostRock defines adjusted EBITDA as net income (loss) before income taxes; interest expense, net; depreciation, depletion and amortization; other (income) expense; change in fair value of derivative instruments; loss (gain) on sale of assets; stock based compensation and impairments. The following table represents a reconciliation of net income (loss) to EBITDA and adjusted EBITDA for the period presented:

Although adjusted EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, or GAAP, management considers it an important measure of performance. Adjusted EBITDA is not a substitute for the GAAP measures of earnings or cash flow and is not necessarily a measure of the Company's ability to fund its cash needs. In addition, it should be noted that companies calculate adjusted EBITDA differently, and therefore adjusted EBITDA as presented herein may not be comparable to adjusted EBITDA reported by other companies. Adjusted EBITDA has material limitations as a performance measure because it excludes, among other things, (a) interest expense, which is a necessary element of business to the extent that an entity incurs debt, (b) depreciation, depletion, amortization and accretion, which are necessary elements of any business that uses capital assets, (c) impairments of oil and gas properties, which may at times be a material element of an independent oil company's business, and (d) income taxes, which may become a material element of the Company's operations in the future. Because of its limitations, adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of PostRock's business.

Dilution

At March 31, 2011, we had 8,290,482 shares of common stock issued and outstanding. In addition, White Deer holds warrants to purchase 19,875,191 shares of common stock at a weighted average exercise price of $3.21, and we have 392,000 unvested restricted stock units outstanding. Consequently, if these shares were included as outstanding, our outstanding shares would be 28,557,673 of which White Deer's warrants represent approximately 70%. Because we recorded a loss for the quarter, the warrants and restricted stock units would be antidilutive so they are excluded from our diluted share calculations. By exercising their warrants, White Deer can benefit from their respective percentage of all of our profits and growth. In addition, if White Deer begins to sell significant amounts of our common stock, or if public markets perceive that they may sell significant amounts of our common stock, the market price of our common stock may be significantly impacted.

CONTACT: Company Contacts: Jack Collins Chief Financial Officer (405) 702-7460 North Whipple Manager, Corporate Development & Investor Relations (405) 702-7423